Financial Experts Highlight High-Performing Small and Mid-Cap Stocks Defying Historic Market Crash
Financial journalist Tomoya Okamura picks up the story! Stocks to Target with NISA "Growth Investment Limit
On August 5th, which became known as the ‘Black Monday of the Reiwa era,’ the Nikkei Stock Average recorded its largest drop ever, falling by 4,451.28 yen. Just a month earlier, it had reached an all-time high, only to plummet like a roller coaster. While the market seems to be steadily recovering, what stocks should individual investors consider from here? We asked financial journalist Tomoya Okamura.
- Tomoya Okamura (Okamura Yuya) Financial Journalist
【PROFILE】 Born in 1980 in Hiroshima Prefecture. After working at a major securities company and an investment information company, he became independent in November 2010. He is active as a host of economic programs, as well as a contributor to money magazines and a lecturer at various seminars.
The historical decline was driven by the ‘Yen Carry Trade.’
The Nikkei Stock Average recorded a drop of 2,217 yen (a 5.8% decline) on August 2nd, ranking third in history in terms of decline, followed by a historic first-place drop of 4,451 yen (a 12.4% decline) on the next trading day, August 5th.
The Bank of Japan made an additional rate hike, but it was only 0.15%. Although Governor Ueda of the Bank of Japan showed a hawkish stance in the post-meeting press conference, most investors were probably left wondering, ‘Why this much?’ as the crash reminded them of the post-Great East Japan Earthquake and the global outbreak of COVID-19.
I was also surprised by the speed of the subsequent rebound. While Vice Governor Uchida of the Bank of Japan’s ‘firefighting comments’ played a role, it once again made me keenly aware of the strong relationship between the dollar-yen exchange rate and Japanese stocks (a weaker yen leads to higher stock prices, while a stronger yen leads to lower stock prices) and reminded me of the significant impact of the ‘yen carry trade’ behind it.
This time, the unwinding (reversal) of the yen carry trade progressed at an ultra-fast pace, and it was significant that the market quickly recognized that this was the ‘epicenter’ of the decline. As the unwinding of the yen carry trade progresses, the selling pressure will decrease, but this is a crucial point, so I will explain it in more detail.
Understanding the “Yen Carry Trade” That Shook the Market
Behind the rapid and significant market swings was the skewed positioning of global institutional investors, who manage massive amounts of funds across markets worldwide. Among these, the “yen carry trade” had the most significant impact on Japanese stocks.
The yen carry trade involves borrowing yen at low interest rates, converting it into higher-yield currencies like the dollar, and aiming to earn profits from the interest rate differential.
Typically, investors hold a “yen selling and dollar buying” position, so when this trade increases, it puts downward pressure on the yen in the foreign exchange market, driving the yen’s depreciation until now.
However, immediately after the Bank of Japan’s additional rate hike on July 31st, the expectation emerged that the interest rate differential between Japan and the U.S. would narrow sooner than anticipated.
Investors engaged in the yen carry trade scrambled to unwind their “yen selling and dollar buying” positions. This resulted in large-scale “dollar selling and yen buying” in the forex market, leading to a rapid and dramatic appreciation of the yen.
■ Yen Selling Positions Unwound, but the Yen’s Influence Remains Strong
Let’s take a look at the yen positions of speculators (hedge funds) in the currency futures market of the Chicago Mercantile Exchange, as disclosed by the U.S. Commodity Futures Trading Commission (CFTC)【Table 1】. The fact that these positions have long been in the negative indicates that speculators in the currency futures market were heavily skewed towards “yen selling positions.”
However, after the Bank of Japan’s meeting, these yen selling positions rapidly decreased. By August 13th, they had finally shifted to “yen buying positions.” This is the first time since March 8, 2021, that positions have shifted to yen buying. It shows that speculators quickly unwound the yen selling positions they had accumulated over time.
Previously, Japanese stocks had been rising significantly due to improvements in corporate performance driven by the weak yen. This sudden and panicked yen appreciation led to the market crash. Even in the current market, the strong correlation between “weak yen, strong stocks” or “strong yen, weak stocks” remains evident, and the yen’s exchange rate will likely continue to have a significant impact on Japanese stocks going forward.
The Market Understands This is Different from Past Shocks.
The rapid yen appreciation and stock decline caused by the unwinding of the “yen carry trade” led to a sharp rise in volatility—the measure of market price fluctuations—in both Japan and the U.S., as institutional investors sought to hedge against further declines.
When volatility spikes, a vicious cycle can temporarily occur where stocks are sold off mechanically, causing volatility to rise even further (volatility increases → stock prices fall → volatility increases → stock prices fall). However, these movements in both Japan and the U.S. quickly subsided.
The crash on August 5th felt almost apocalyptic, but the market seemed to calmly recognize that this was different from past incidents that were dubbed with names like “Somekind of Shock.” The market appeared to act with a level-headed understanding of the situation.
Individual Stocks Also Rebound Significantly After the Decline
Japan’s stock market experienced significant turbulence in August. The Nikkei 225, which closed at 39,101 yen at the end of July, fell to a low of 31,156 yen on August 5th, but by August 16th, it had recovered to 38,062 yen.
Despite such a dramatic drawdown, the current level is 97.3 when compared to the end of July, which is set at 100. The sense of “back to normal” is quite strong. The same can be said for individual stocks.
During the sharp decline in August, 1,067 out of 1,646 Prime-listed stocks (65% of the total) updated their year-to-date lows. Let’s take a look at the performance of the top 10 stocks by market capitalization among them【Table 2】.
Even Toyota Motor Corporation, which updated its all-time high in late March, saw its year-to-date low updated in August. In terms of maximum drawdown (decline rate) from the end of July, Toyota experienced a drop of -26%, while Mitsui & Co. saw a decline of -32%, a truly chaotic situation.
However, when looking at the “rebound strength” listed alongside these figures, it becomes clear that each stock recorded a rebound nearly equivalent to the drop.
In other words, what occurred during this crash and subsequent sharp rebound can likely be identified as a phenomenon known as “return reversal,” where buying occurs during a market downturn.
The market’s breakdown caused investors to become extremely cautious about risk. Typically, you might expect to see investors slowly buying up undervalued stocks with high dividends or defensive stocks whose performance is less influenced by economic conditions during a temporary price dip. However, such behavior was entirely absent.
Instead, what we saw was a short-term movement focused on targeting the rebound strength of stocks that had experienced significant declines (focusing on buybacks). Among the stocks, only Keyence managed to turn positive from the beginning of August. Although there has been some recovery from the overselling, the wounds are far from fully healed.
Furthermore, as a result of the sharp decline, many investors are now holding stocks with unrealized losses. This has created a significant amount of “sell” pressure at the levels where prices have rebounded, making it reasonable to assume that any further upside from here will be difficult.
Stocks That Have Surged Over 10% in August After Updating Year-to-Date Lows
Stocks that have only managed to rebound to the extent of their previous declines are still unable to show a net gain for August, similar to the Nikkei 225, which has not turned positive for the month.
Are there any stocks that, despite falling initially, have experienced remarkable rises and are up significantly in August? We investigated this, including small and mid-cap stocks.
Among Prime-listed stocks that faced the misfortune of updating their year-to-date lows in August but then made a strong recovery, several have seen increases of over 10% from the beginning of the month.
Focusing on stocks with a market capitalization of over 50 billion yen, we find companies like Hokko Chemical Industry and Irex among a total of 11 stocks【Table 3】. However, it is not necessarily the case that undervalued stocks, as measured by metrics such as PER, PBR, and dividend yield, are being prioritized for buying.
Common among the stocks that have risen significantly is that many, despite plunging to year-to-date lows in August due to a deteriorating market environment, showed extraordinary positive reactions to the positive earnings reports released during that period.
Ideally, growth stocks with positive earnings prospects should not have updated their year-to-date lows at this time. It is clear that money has flowed into these stocks. The saying “cheap is bad” might apply here. Instead of just high dividend yields (due to low stock prices), the “quality” seen in earnings is likely to be the key factor.
■ In the paid version of “Friday’s subscription”, Tomoya Okamura highlights three noteworthy stocks among the 11 small and mid-cap stocks that have shown remarkable performance after overcoming the August crash.
Interview and text： Kenji Matsuoka
